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Tuesday, December 27, 2016

Bamboo, one
of the oldest plantations in India is not as well tapped in India as compared
to the other countries. This is very strange as it’s a native of India, yet, we
do not realize its importance and right usage. Prashant and Aruna set out to
revive the bamboo usage in India. Prashant is a Post Graduate in Management
from Osmania University and Aruna is a Post Graduate in Science from Nagpur
University. During their search for furniture, they realized that the market
was dominated by iron, steel, plastic and wooden furniture. Bamboo was nowhere
to be seen. Their search for eco-friendly furniture led to the emergence of
Bamboo House.

Here is the
story of Bamboo House from its founders Prashant and Aruna.

Bamboo
House is a social venture focused on incorporating bamboo to provide
sustainable livelihood. Would you like to talk about your ‘green’ startup and
its emergence?

Bamboo
House is a “Social Enterprise” utilizing bamboo as an economic driver for
providing sustainable livelihood opportunities through business models designed
to work at the base of the economic pyramid and promote bamboo as an
eco-friendly substitute to wood, steel, iron and plastic.

On a sunny
evening we were shopping around to buy a sofa set for our home but noticed that
market was inundated with routine wood, steel, iron and plastic furniture. We
searched around and noticed that overseas markets offered numerous bamboo
product opportunities but Indian markets offered no simple solution.

Our search
for bamboo furniture landed us up in a small village called “Katlamara”
in the state of Tripura on the India – Bangladesh International border. “Katlamara”
is a sleepy little village, one of the many bamboo and skill rich locations of
our country. Village “Katlamara” is politically India but geographically
Bangladesh (during Independence, King of Katlamara decided to merge with India).
We decided to understand Indian bamboo sector and went for a “study tour” as we sensed Triple
bottom-line impact bamboo could create. We had no specific Entrepreneurial
motive since we had no idea what bamboo was all about.

Family and friends were surprised at our decision, we were less than a
year into our marriage, and left our respective careers. I was in my
established imports business and Aruna dropped her plans of pursuing her Ph.D.
We knew it was a big risk but were prepared. I handled half of country's forest
and Aruna handled the other half and finally in May 2008 our study tour led to
the evolution of our Social Enterprise “Bamboo House” in Hyderabad.

Any
particular reason for choosing “Bamboo”? Do you have any expert team for
choosing the bamboo appropriate for product development?

We chose Bamboo for Triple Bottom-line Results:

Social: Bamboo can help more than 5 million of our population cross the
poverty line

Environmental: Bamboo minimizes emission of CO2 gases and generates up
to 35% more oxygen than equivalent stand of trees.

Financial: Indian Bamboo Market is estimated at Rs. 26,000 Crores by the year
2015 which provides strong growth opportunities

What
are the pricing strategy/ methodology adopted at Bamboo House for product
pricing?

We have no
defined strategy for pricing as we are not operating under fair market
conditions.

Bamboo
based products are eco-friendly but the fear of termites, pest attacks always
prevail. How do you ensure effective monitoring to avoid damage?

Treatment
and seasoning of bamboo is done over a period of 12 -15 months and all required
technical precautions are taken to ensure products / projects lasts a lifetime,
and in any case not less than 30 years.

What
are the major challenges faced by you in developing this venture?

We did face
several challenges in developing this venture. Bamboo is under Regulatory
constraints as per the Forest Act 1927. Harvesting & Transportation of bamboo
is not permitted under the Act. Another problem is that Forest Act does not
provide any right to choose the bamboo. We have to buy what is sold but while
making products we make the right selection from available stock. There are
various other challenges like:

·There is
no benchmark to follow in this industry

·Raw
material available through forest auction is not suitable for commercial
applications

·Every
state has its own laws on bamboo for forests being in the concurrent list of
the constitution

·Bamboo
traps both air and moisture, making it a difficult raw material to work with

·Most of the tribal forest areas are inhabited by Naxalites

·Learning the concept and mapping Raw Material
species and Resource base is a challenge as well

·Development of Logistics, supply chain,
distribution, operations and Business modeling

·Scaling and building volumes in this business is not
easy

·Lack of communication and transportation facilities
at the production level

All of
these make the business quite difficult operationally.

What
according to you is the unique selling proposition (USP) for Bamboo House?

Domain
expertise, passion and our ability to play well in this sector. We have very
high domain knowledge which helps us.

Has
bamboo house received any funding in the past? Are you seeking more funds in
the future?

We decided to fund/ support our social venture through borrowings from friends
and family apart from very little personal savings we had. We knew that no
bank/ financial institution would come forward to support us initially.

We raised
our first bank loan from Bank of Baroda under PMEGP Scheme under Credit
Guarantee Scheme and are now looking to raise funds again to scale our
initiative.

What
are your future plans? How do you see ‘green architect’ evolving in the future?

We will persist in our endeavor to create sustainable livelihood models
and ensure larger involvement at the grass root level. We understood that our
country cannot grow and develop if our villages don't grow and we believe that bamboo
can serve as one of the growth engines for the country. Some of our new initiatives are: Bamboo
Bicycle, Recycled Tyre Furniture, Recycled Tyre Planters, Recycled Tyre Bags,
Recycled Tyre Footwear, Bio-Degradable Sanitary Pads, Incinerator for Disposal
of Used Sanitary Pads, Recycled Drum Furniture, Street Dust Bins – With Scrap
Drums, Low Cost Bamboo Based Toilets for Rural India.

What
has been your Eureka! Moments in the journey so far?

Had it not
been for the media support, we wouldn’t have travelled this far in our bamboo
journey. Nearly 25 of country's leading news channels and 150 newspapers and
magazines including BBC helped us in taking our work ahead, as we were very
clear from the beginning that community model should be media supported and
market driven only then livelihoods can be sustained at the base level.

2013 – March-April: Our Bamboo Initiative received further
support, through “International Visitor Leadership Programme (IVLP)” - A 4 week
programme of the US State Department.

On October 21, the National Payments Council of India
confirmed one of the country’s biggest data breaches: a compromise of 3.2
million debit cards issued by leading banks including the State Bank of India,
ICICI Bank, HDFC Bank and Axis Bank. It was a reminder that even as the
Narendra Modi government has embarked on the Digital India campaign, cyber
vulnerabilities and their costs to both the private and public sectors are
significant and increasing.

Various studies show that the number of cybercrimes has been
increasing substantially. As per data from the National Crime Records Bureau,
it grew by 23 times over the 2005-2015 period.

An Ernst & Young report said that 40% of respondents
from India highlighted an increasing level of concern around cyber breaches or
insider threats over the last two years. In March 2016, Ravi Shankar Prasad,
then Communications and IT minister of India, reported to the upper house of
parliament that in the year 2014, cybercrime cases in India went up by 69%.

Countermeasures in
Progress

The government has stepped up efforts to combat cybercrime.
Programs include public education to spread awareness, and there is a proposal
to set up a cybersecurity and e-surveillance agency. In addition, the Reserve
Bank of India, Securities Exchange Board of India and other regulators have
issue cybersecurity guidelines and are expected to beef them up.

Microsoft Corp. has launched a Cyber Security Engagement
Center (CSEC) in the National Capital Region. Microsoft India Chairman Bhaskar
Pramanik said that “CSEC’s mission is to help build a trusted and secure
computing environment, a critical enabler for India’s digital transformation.
It will work towards fostering deeper cybersecurity collaborations with public-
and private-sector organizations.”

In announcing the commitment, Pramanik said, “Cybersecurity
is crucial for Digital India. A data driven economy can flourish only when
governments, businesses and individuals have access to hyper scale and hyper
flexible cloud computing with the confidence that their data is secure.”

Even as such initiatives become more critical, the National
Cyber Security Policy of 2013 has not yet been implemented. Coordination is
essential to tackle the menace of cybercrime. During the recently concluded
CyFy 2016, the India conference on Internet Governance and Cyber Security,
organized by the Observer Research Foundation, in Delhi, Carl Bildt, former
Prime Minister of Sweden and head of the Global Commission on Internet
Governance (GCIG), told the Times of India that “as an emerging cyber power,
India needs to engage seriously on issues of Internet governance.”

Liability Insurance

While it is taking time to devise and implement policies at
the national level, there is a solution that businesses can consider
immediately: cyber liability insurance. The product has been available in the
Indian market for some time, and companies in the IT, IT-enabled services and
health care industries are showing interest. Most banks, however, have not gone
beyond buying the mandatory bankers’ indemnity coverage.

“Cyber liability insurance is becoming very important
nowadays, especially in the backdrop of the rising number of instances of
cybercrime and data breaches,” says Sushant Sarin, senior vice
president–commercial lines, Tata AIG General Insurance Co. Ltd.

“We see that more and more companies are buying them,” he
says. “Those companies which were the first movers are buying more cover, and
those that have not bought it yet are starting to explore it.”

The “limit of liability” for which companies need to buy
insurance depends upon various factors, such as the type and volume of data,
origin of data, location where the data resides, sensitivity of the data, data
security protocols, peer group benchmarking, etc.

“If the data originates from Europe or the U.S., the data
privacy laws are stricter there, so more Insurance will be required,” Sarin
explains. “Similarly, if the data is personally sensitive or creates financial
vulnerabilities, the amount of Insurance required will be much more.”

Possible Payouts

Sarin says that the amount payable by an insurance company
when a cybercrime or data breach occurs would depend upon such factors as how
the data got out; costs of notifying customers about the breach; fines or
penalties imposed by regulatory bodies; damages awarded by courts to affected
customers; reputational damage, etc.

One reason why some companies have not yet bought cyber
liability coverage could be lack of awareness about the products, or a
misguided belief that their organizations are secure. Given the current level
of cyber risks and the likelihood that they will only get worse, the ready
availability of insurance provides a practical option.

Saturday, November 19, 2016

This article was first published by the Global Association for Risk Professionals on November 18, 2016.
http://www.garp.org/#!/risk-intelligence/operational/political/a1Z40000003McKvEAK/indias-lesson-in-demonetization

The victory of Donald J. Trump in the U.S.
presidential election was not the only surprise in the global news on November
8, 2016. That evening, Indian Prime Minister Narendra Modi addressed the nation
and announced that Rs500 and Rs1000 currency notes would “cease to be legal
tender,” effective at midnight. “This step will strengthen the hands of the
common man in the fight against corruption, black money and fake currency,” he
said.

The scheme in 1978 was not deemed to be very
effective, as “the element of intended surprise and secrecy was also not well
maintained and thousand rupees notes were already out of circulation one week
before the demonetization. Reportedly large amounts of high denomination notes
were sent to Gulf countries, especially to Dubai and Kuwait, a few days before
the ordinance was announced.” (Kishore C. Samal, Chasing Black Money in
India) http://www.ispepune.org.in/PDF%20ISSUE/1992/JISPE2/Chasing-Black-Money-in-India.pdf

So secrecy became an absolutely necessary
condition. Any leaks would have rendered the entire exercise futile by tipping
off the black-money hoarders.

In a 1976 paper, On Black Money, http://www.jstor.org/stable/pdf/42657322.pdf
K. Sundaram and V. Pandit wrote, “Since it is infeasible to demonetize
currencies of all denominations, the success of this policy [demonetization] turns
on the extent to which black liquidity is in the shape of currency of the
denominations to be demonetized.”

Data from the Reserve Bank of India show that 86%
of all currency in circulation is in the Rs500 and Rs1000 denominations,
amounting to Rs14.2 trillion, or $212 billion.

Sundaram and Pandit added: “. . . insofar as the
measure is anticipated in advance by some and conversion of currency in the
relevant denominations takes place, success of this measure is further eroded.”

The policy did not take care of black money in the
form of real estate or gold or other non-currency assets. There are expectations and rumors of
crackdowns in the near future on those who have bought real estate and gold
through black money.

Those who got Rs500 and Rs1000 notes converted were
handed Rs2000 notes by the banks; Rs100 notes were available at automated
teller machines (ATMs). The long queues at ATMs, and out-of-order ATMs,
indicated that many people were either without cash or, with Rs2000 notes, were
unable to complete small-value transactions because retailers, unequipped with
smaller-denomination notes, were not willing to accept the Rs2000 notes.

As a result, many people who had never used debit
cards began to do so. Many small retailers and suppliers of daily provisions
started asking people to pay by card, cheque or digital wallets – cashless
modes of transactions that will bring greater transparency and help curb the
creation of black money in the future.

Inflation
and Taxation

Dr. Arvind Panagariya, vice chairman of NITI
Aayog, http://niti.gov.in/ told the
Economic Editors’ Conference—2016 that “as the black money goes out of the
system, the money supply will shrink to some degree. This will reduce inflation
rate in the absence of any open market interventions by the Reserve Bank of
India.”

A drop in inflation, coupled with banks deposit
flows, will give the RBI room to lower interest rates in the future.

The scheme is designed in such a way that people
hoarding large amounts of undeclared income in cash will find it difficult to
dispose of that cash. There are no limits to deposits of Rs500 and Rs1000
denominations, but it has been made clear that deposits above Rs250,000 would
be scrutinized and matched with the account holders’ income tax returns.
Mismatches could lead to penalties of 200% of the tax
payable, along with the payment of the tax payable.

Modi Initiatives

One of the reasons for the Narendra Modi government’s
coming to power was public reaction to scams and corruption. Modi promised to
fight corruption and bring good governance and in his November 8 address listed
previous measures taken:

·A law passed in 2015 requiring disclosure of
foreign black money.

·Agreements with many countries, including the
U.S., for sharing banking information.

·A strict law in force from August 2016 to curb
benami (nameless or fake-name) transactions.

The prime minister told the citizens that almost
Rs1.25 trillion was uncovered due to these efforts in the last two and a half
years. He vowed that many more measures will come in the future.

Acknowledging the inconveniences, Modi implored the
citizens to be patient and support the fight against corruption – to accept
temporary hardships in the interest of a better India.

Political
Reaction

Although the national mood seems generally
positive, there was strong opposition from other political parties. Indeed, many
political activities in the country are funded with black money.

Then there are cynics. To them, I would suggest an
analogy: Corruption and black money is like cancer. A patient might prefer to
withhold information from doctors in order to avoid painful treatments, or
might want to avoid treatments without 100% assurance of a cure, which is
unrealistic.

Tackling black money is important and should not be
avoided. No amount of preparation will be enough in a country of 1.2 billion
people, and there is always room for improvement.

Singapore’s The
Independent hailed the demonetization, saying, “Modi does a Lee Kuan Yew to
stamp out corruption in India,” a reference to that country’s transformational
leader.

Time will tell if the policy will contribute
towards making India a fairer, transparent and corruption-free economy. Black
money and corruption are so deep-rooted that they cannot be completely
eliminated. More efforts and persistence will be required. To paraphrase Robert
Frost, there are miles to go before we sleep.

China is 29th, India 39th in the World Economic Forum’s
annual index, which is led by Switzerland, Singapore and the U.S.

India ranked 39th in the
2016-’17 Global Competitiveness Report, recently published by the World
Economic Forum. The South Asian nation is 16 places higher than it was the
previous year, and 32 above its 2014-’15 rank, and now most of those ahead of
India are developed countries in terms of income or other parameters. (See
illustration below for factors that go into the WEF analysis.)

In the competitiveness ranking
topped by Switzerland, Singapore and the United States (unchanged in that order
from a year earlier), followed by the Netherlands and Germany (switching places
4 and 5), China was 28th, unchanged since 2014-’15. Brazil has slipped to 81st
(from 75 in 2015’-16 and 57 in 2014’-15). Russia improved to 43 from 45, and
South Africa to 47 from 49.

In its region, India was
best-performing in areas such as infrastructure, goods market efficiency,
financial market development, market size, business sophistication and
innovation. India still has a long way to go in health, primary education and
labor markets — despite significant improvements health and education over the
last decade.

What is behind the rise of India
in the world competitiveness ranking?

Market size — India’s
huge domestic market worked in its favor. Johan C. Aurik, chairman and global
managing partner of strategy consulting firm A.T. Kearney, in an interview with
Livemint, said that India, with an economy trailing only those of the U.S. and
China, “is lucky that it is so big that it does not need the world.”

Financial market development
— After being marred by scams in the 1990s and early 2000s, India’s stock
markets have advanced in terms of modernization and technology, with the
regulator (Securities and Exchange Board of India) backing efforts to bring
them up to international standards.

Figure 1

Source: World Economic Forum

Similarly, the Reserve Bank of
India (RBI) has taken steps to improve the bond markets, bring transparency to
non-performing assets and bring inflation under control. The image of the
central bank went up many notches under its 23rd governor, Raghuram Govind
Rajan, who was succeeded in September by Urjit Patel.

Institutions — Policy
paralysis, misuse of public money and infrastructure were among the reasons
that people lost trust in public institutions and administration in the last
few years of the United Progressive Alliance (UPA) government. In 2014, when
the National Democratic Alliance (NDA) came to power, the Narendra Modi-led
government has lifted public confidence.

Goods market efficiency —
Although India is the best-performing country in South Asia in goods market
efficiency, it has actually declined in this measure over the last decade. With
passage of the goods and services tax (GST) by the parliament earlier this
year, and efforts ongoing for an April 1 implementation, there may be
significant improvement in overall market efficiency. “GST was a miracle, I
thought it would never happen,” Aurik said.

Infrastructure — The key
infrastructure ministries are seen as having done their job well over the past
couple of years. The government has designated infrastructure as a top
priority, and there has been significant, perceptible progress in power, roads
and shipping, and railways. Besides planning to spend billions of dollars on
infrastructure, the government has relaxed regulations to attract foreign
direct investments (FDI) in the sector.

Labor market efficiency —
India ranks lowest in this pillar (112th out of 138 countries). The current
labor laws are outmoded and rigid. Although labor law reform is on the
government’s agenda, it is a politically sensitive issue, and small steps meets
with resistance. The proposed reforms would make hiring and firing easier for
the large public sector undertakings.

Macroeconomic environment
— The Indian economy is poised for further growth. Per capita income has almost
doubled in the last six to seven years. The foreign exchange reserves of more
than $360 billion help in maintaining confidence in monetary and exchange rate
policies and enhance the capacity of the central bank to intervene in forex
markets. The economy is well placed for meeting external obligations, and
maintaining investor confidence helps to attract much-needed FDI.

Although fund managers are
parking money in India due to the advantage they get from the positive interest
rate differential, a lot of these funds, just as in other Asian economies, are
seeking a more permanent destination. India is now the top FDI destination for
the world. Prime Minister Modi sends out the right signals about the commitment
of the government to providing the right environment for development.

Technology readiness —
India has not done well in technology readiness despite its success in IT
outsourcing. Regulators must keep up with the sophistication in market
technology and new market structure. Enforcement cases will become more
complicated as market manipulation and other misconduct are now also conducted
on the Internet, where they are difficult to detect.

Cybercrime surveillance should
be updated periodically. Also, whether a demutualized exchange should be
regulated as any other listed company, or as a utility, will be a challenge for
the regulators.

Health and primary education
— Jim O'Neill, the British economist and former chairman of Goldman Sachs Asset
Management credited with coining the term BRICs (Brazil, Russia, India and
China), wrote on Bloomberg View about 10 things that India must do to achieve
its potential. Two of those 10 were related to education — primary and
secondary as well as colleges and universities. (Liberalizing financial markets
and building more infrastructure were among the others.) Education is essential
if the population of India is to be a true asset for development.

On the health front, the average
growth in total health care spending is lower than the average GDP growth rate
and lower, as a percentage of GDP, than that of even low-income countries, as
classified by the World Bank. (India is classified as low-middle income.) It is
estimated that nearly one million Indians die every year due to inadequate
health care facilities, and close to 700 million have no access to specialist
care.

Higher education and training
— The country is home to the Indian Institute of Technology and the Indian
Institute of Management, yet many graduates in India are unemployable. The
quality of faculty and infrastructure and the number of institutions of higher
education need beefing up.

Business sophistication and
Innovation — There has been significant improvement in both business
sophistication and innovation owing to increased research and development
activities and the ecosystem for promoting start-ups.

Although many indicators are
favorable, Prime Minister Lee Hsien Loong of Singapore, on a recent visit to
India, said the country remains a difficult place to do business. Gaps in the
regulatory framework and other crucial areas need to be addressed. India’s
competitiveness ranking is an endorsement of the steps that have been taken and
a reminder that there are still “miles to go.”

Warren Buffett,
the chairman of Berkshire Hathaway, was a student of Benjamin Graham, the
foremost guru of value investing, at Columbia Business School. Buffett is
Graham’s most famous disciple and has attracted many to adopt value investing.

“Intrinsic value”
and “margin of safety” are the two keys to value investing.

When shares are
bought at a price cheaper than what the market values them at, and sold at a
higher price later, value is extracted through this transaction.

Sanjay Bakshi,
managing partner of Value Quest Capital, a value investor, professor, and
ardent fan of Warren Buffett and Charlie Munger, said in an interview, “There
are times when the markets are extremely inefficient, and at that time you
should take advantage of the market. If ‘Mr. Market’ is buying you out at crazy
valuation, give him your shares, and if he is willing to offer his stake very
cheap, take it. This fundamental principle of value investing has never been
compromised by Buffett or any successful value investor.”

Margin of Safety

Graham’s margin of
safety is one principle that has had a profound influence on Buffett. It is the
difference between a stock’s market price and its intrinsic value. For example,
if the market price is much below intrinsic value, the margin of safety is
large enough to protect the investor against future uncertainty and market
downturns.

“If you were to
distill the secret of sound investment into three words”, Graham wrote in his
book The Intelligent Investor, “we venture the motto, margin of safety.”

Firms which trade
at a high margin of safety dramatically reduce the risk of a permanent loss of
capital.

Sanjay Bakshi
offers an explanation: “You need a gap between value and price because value
might drop, or your valuation might be wrong. Great businesses get destroyed
because of many reasons including technological obsolescence, change in
regulations, natural calamity or management hubris. Value investors don’t buy
dollars for 95 cents because that leaves little margin of safety. They buy at
50 or 60 cents or even lower. This principle too has not been compromised by
any successful value investor.”

‘Great Companies’ and Book Value

While Graham
advocated buying stocks that are underpriced relative to their intrinsic value
and can earn more than what the market expects – that is, stocks with very high
margin of safety or those trading at large discounts – Buffett does not shy
away from buying at reasonable prices what he deems a “great company.”

Graham advocated
that a defensive investor should look for companies with current ratio of at
least 2, long-term debt not more than net working capital, positive earnings
for each of the past 10 years, uninterrupted dividends for the past 20 years,
33% increase in earnings per share for the last 10 years using a three-year
moving average, price not more than 15 times past three-year-average earnings,
etc. Some of these were based on the then prevailing market conditions in the
U.S. and can be easily modified to suit the changed conditions, different risk
appetites and different countries.

Graham also
suggested that conservative investors buy stocks at prices close to their book
value per share, and no more than one-third above that figure. However, this
criterion alone may not indicate a sound investment, and investors must verify
that the company has a sufficiently strong financial position and its stock is
selling at a suitable ratio of earnings to price.

Due to the
emphasis on book value, which excludes intangibles, the criteria will tend to
exclude firms that have considerable assets in the form of goodwill, patents,
software, franchises, etc. While Buffett did invest largely in traditional
stocks like General Motors and Coca-Cola in the initial days, his portfolio has
changed over the years to include the likes of Verisk Analytics and IBM, which
have considerable intangibles.

Financial Sector

A common refrain
among Graham watchers and followers is to stay away from financial services.
These stocks have a very different model, especially when it comes to
deposit-taking institutions where the assets are essentially leveraged products
and the liabilities can never be truly paid-off, as that would lead to a
collapse.

However, according
to The Intelligent Investor, “We have no very helpful remarks to offer in this
broad area of investment other than to counsel that the same arithmetical
standards for price in relation to earnings and book value be applied to the
choice of companies in these groups as we have suggested for industrial and
public-utility investments.”

The financial
services sector as a whole is very diverse, with numerous banking, brokering
and asset financing services coming under the umbrella. Buffett has over the
years invested in such companies as American Express, Bank of New York Mellon,
Goldman Sachs and Wells Fargo.

Although Buffett
has himself said in the past that he is “85% Graham,” it is safe to say that
his investment style has evolved over the years and adapted to changing
business scenarios. As Bakshi puts it, “Buffett did not change any basic
principle of Graham. He just applied them in a different manner.”

Is diversification the best way
to invest in the market today? Not really. The portfolios of major investors
worldwide make the case for another, often-ignored, strategy: concentration.
Business schools need to refrain from pushing the merits of diversification
without highlighting the efficacy of concentration.

“Do not put all your eggs in one
basket. Diversify.” In 1952, investment aspirants received this clarion call
from Harry
Markowitz, a US
economist and Nobel laureate. Peter
Lynch, the
famous US businessman and stock investor, “never saw a stock he didn’t like”
and was a great proponent of portfolio diversification. While managing the
Magellan fund, at the peak of his career, Mr Lynch’s portfolio had more than
1,000 stocks. To date, portfolio diversification remains the most important
lesson taught to students of investment and risk management. The concept is a common
thread in the investment approach of most fund managers and investors.

However, if we look at the
portfolios of the rich and famous, they are, surprisingly, mostly concentrated.
Several great investors, spread across geographies, have very concentrated
portfolios. Warren Buffett, George Soros, Rakesh Jhunjhunwala and many others
are renowned proponents of portfolio concentration. To Mr. Buffett,
over-diversification presented a “low-hazard, low-return” situation and thus he
dismissed it. A concentrated portfolio pivots on the absolute conviction of the
investor in his or her stocks and his or her risk appetite.

A diversified portfolio, on the
other hand, works well if the investor is optimistic about the stock, but wary
of the associated risk. Investors like the first billion-dollar Indian
investor, Mr. Jhunjhunwala, walk a fine line between the two.

John Maynard Keynes, the
influential British economist, was another staunch supporter of concentration.
“As time goes on, I get more and more convinced that the right method in
investment is to put fairly large sums into enterprises which one thinks one
knows something about and in the management of which one thoroughly believes,”
he once said.

Mr. Buffett, echoing Benjamin
Graham, the father of “value” investing, says he does not just buy an
insignificant thing that bounces by a small percentage every day on the stock
market. He buys part of a real business and thinks like the owner of a business
would.

Mr. Buffett says: “Wide
diversification is only required when investors do not understand what they are
doing.” Bruce Berkowitz, founder of Fairholme Capital and a leading “value”
proponent, adds that just a handful of significant positions are enough to do
unbelievably well in a lifetime.

Advocates of concentration also
opine that building or creating wealth with a diversified portfolio is
difficult, unless the entire market is experiencing a bull phase and all the
stocks in the portfolio are performing well. Even then, you may not get the
full advantage of a multi-bagger as your investment in that particular stock
would be just a fraction of your entire portfolio. The anti-diversification
camp proposes that to generate wealth some concentration is required, provided
people know how to assess their risk appetites and simultaneously pick winning
stocks.

Fund managers today are caught
in a catch-22 situation. Is wealth generated first by diversification and then
maintained through concentration or vice versa? Knowing that concentration has
been the mantra for success for most investment gurus, is it savvy to jump on
the “diversification bandwagon” by adhering to popular belief? Awareness of
such dilemmas and seeking clarity on them is essential for future managers.

It is, thus, time for business
schools to introduce concentration as an important strategy in wealth creation,
management and enhancement. Special attention needs to be given to this in
business pedagogy, as the training of financial advisers and finance students
will remain incomplete if it is restricted to the hallowed realm of
diversification as the only plausible investment strategy.

Mounting motor insurance claims have been a source of worry
for general insurers in Malaysia. They suffered a net loss ratio for Motor Act
business of 219.6% in 2015, and an above-100% combined ratio for the total
motor portfolio. The losses are attributable to high frequency of third-party
bodily injuries, rising accident rates and medical costs, as well as fraudulent
claims (Source: ISM Insurance Services Malaysia’s Statistical Yearbook.)
Industrywide efforts are being made to control the fraudulent claims payout. A
fraud detection and prevention system of Insurance Services Malaysia (ISM) is
part of the industrywide effort to control payouts of fraudulent claims.

ISM was conceptualized in 1998 by the General Insurance
Association of Malaysia (PIAM), initially to establish the Malaysian Insurance
Rating Organization. In 2003, MIRO and the MIS department were merged to form
the ISM department, and the scope of the project was expanded to include
anti-fraud and IT-related services. ISM Berhad was incorporated in 2005 and today
provides an infrastructure of databases and analytics that allows members to
make informed decisions and support a liberalized pricing environment, build
competencies in quantitative underwriting and technical pricing, and increase
efficiencies in operations. The shared information and capabilities are
accessible online to enhance fraud detection.

Mahendran (Mahen)
Samiappan, the chief executive officer of ISM, discusses in this interview with Dr. Nupur Pavan Bang the general
insurance industry in Malaysia and efforts by the organization to curtail
fraud.

What is the state of
the general insurance market in Southeast Asia, and particularly Malaysia?

Motor Insurance is the largest portfolio in the region,
followed by property. Health insurance is generally sold as a rider with life
insurance policies. So in comparison to the life segment, health is not a very
big business for the general insurance market. Health is also sold as unit
linked policies by the life insurers.

In terms of technology and distribution, Singapore would be
the leader, followed by maybe Malaysia and Thailand. Everyone acknowledges that
Malaysia has good regulations due to the active role played by Bank Negara
Malaysia as the regulator of this industry. We have averaged a growth rate of
6% to 8% in general insurance consistently. In 2015 the industry experienced
much lower growth, 2.7%, and 2016 is expected to have a low growth rate as
well.

What are some of the
major challenges in Malaysian insurance?

The biggest challenge is pertaining to the motor portfolio.
Motor comprises 47% of the total portfolio. It is still under the tariff
regime, for both the third party (act or mandatory) as well as the own damage
(non-act) cover. The act business endures heavy losses as a result of rising
claims-cost bleeding. The current tariff was set out in 1978 and has not been
revised since then.

Bank Negara Malaysia has put in place a road map for gradual
liberalization of motor insurance tariffs. By July 2017, non-act business will
be de-tariffed, and gradually the act business may also see certain adjustments
in prices. The flexibility to price is important for the Insurers, but it may
lead to price wars, as has been witnessed in some other countries. That may
still mean that the portfolio remains loss making.

Is the market ready
to price?

The larger players, who have backing from their foreign
partners with considerable underwriting and technical know-how, are ready for
risk-based pricing. The largest insurer would have about 15% of the market
share and, with that kind of data, coupled with their capabilities, can do the
pricing.

The smaller companies may not have adequate data, and this
is where ISM comes in. ISM was established to support the industry in the de-tariffed
environment. So we will definitely play our role and carry out our
responsibility to support the industry in this transition. The regulator has
also been aggressively going around and assessing the readiness of the
insurers.

Does Malaysia face
the uninsured-vehicle challenge that some markets do? Uninsured vehicles not
only result in loss of premiums for the insurers, they also have huge economic
impact on the uninsured vehicle owners and victims of accidents.

Not really. The Road Transport Department and insurance
databases are linked. So if a vehicle does not have the mandatory third-party
policy, road tax will not be issued by the department. Road tax in Malaysia is
annual, and almost all vehicles would have at least the act policy.

For the victims of road accidents, ISM provides a Vehicle
Information Exchange service – if the vehicle registration number is captured,
the details of the insurer of the vehicle can be obtained.

How is the industry
tackling its leakage problems?

It is true that leakages from premiums as well as claims are
plaguing the insurers. It is plain fraud. In its road map, the regulator has
clearly stated that they want to control and manage fraud. They don’t want the
insurers to be lax on claims and then keep adjusting (increasing) the premiums
to cover the losses. The focus is on fraud and data quality.

ISM’s Central No Claims Discount (NCD) database is already
being used by the insurers to plug leakages at the application stage. Over the
years, the NCD database has evolved into a system called Claims &
Underwriting Exchange (CUE), which provides alerts to the insurers based on
certain business rules. For example when an old vehicle moves from act only
policy to a comprehensive policy, it is unusual, and hence an alert is sent to
the insurer. These initiatives have helped to some extent.

Can you elaborate on
fraud at the application stage?

Fraud at the application stage can be perpetrated by a
customer providing a bogus identity or falsifying records like the driving
license, use of the vehicle, incorrect claims history, etc. There is a strong
linkage between claims fraud and fraud committed at the application stage.
Reducing application fraud can significantly decrease the exposure to certain
types of claims fraud. Stopping fraud at the application stage saves
investigation, claim adjudication, litigation and recovery expenses.

How is the industry
planning to deal with such fraud?

ISM is working on a platform with an objective for
comprehensive fraud detection and prevention. Using analytics techniques such
as predictive modeling, link analysis, anomaly detection and text mining,
claims will be scored, and certain claims with high potential of fraud will be
highlighted based on business rules and analytics. The insurers can allocate
resources to investigate the highlighted claims and thereby make more effective
use of available resources.

However, analytics and models are only as good as the data.
So a right mix of analytics with prudence, diligence and judgment should be
applied by the insurers while processing applications and claims.

On September
4, 2013, the internationally prominent economist Raghuram Govind Rajan took
charge as the 23rd governor of the Reserve Bank of India. He decided in June to depart at the end of his politically
tumultuous three-year term, and with the August 20 announcement of his
successor, deputy governor Urjit Patel, the book on Rajan is officially closing.

A former
International Monetary Fund chief economist and University of Chicago finance
professor, Rajan came in with a “rock star” image, a contrast to his
predecessor, Duvvuri Subbarao, whose performance was the worst ever by an RBI
governor, according to Arvind Panagariya, then professor of economics at
Columbia University and now vice chairman of the government think tank NITI
Aayog. Subbarao had kept the Indian economy relatively stable during the global
crisis period. By the time he entered into the second phase of his tenure, in
2012, the economy was marred by nearly 10% inflation, a depreciating currency
and low GDP growth.

Rajan
dazzled with degrees from IIT (Indian Institute of Technology), IIM (Indian
Institute of Management) and MIT (Massachusetts Institute of Technology) and a
reputation for speaking his mind, was widely credited with predicting the 2008
crisis, and key economic indicators seemed to respond immediately to his moves.

Anticipated
Criticism

When Rajan
addressed the media after assuming office, he said, “Some of the actions I take
will not be popular. The governorship of the central bank is not meant to win
one votes or Facebook ‘likes.’” He said he sought “to do the right thing, no
matter what the criticism, even while looking to learn from the criticism” —
words that turned out to be prophetic.

Over the
three years that ended September 4, 2016, Rajan did mostly the right things. He
brought inflation down, stabilized the rupee, and GDP was going in the right
direction. Yet he could not escape criticism.

There was
really no end to the tug of war between him and the government over interest
rate cuts. The government continually pushed for greater cuts, while Rajan
refused until inflation fell within the targeted range. But even when inflation
was within the targeted range, Rajan did not cut the rates as much as the
government would have liked, citing risks in the global economy, rising crude
oil prices and uncertain monsoons.

Rajan was
also quite vocal about issues that did not directly come under his purview.
That did not sit well with the government, which needed to tread carefully due
to Rajan’s positive image amongst industry, the media and general public.

Return to
Academia

Subramanian
Swamy, a Harvard University PhD in economics and member of the Upper House of
the Parliament of India, stepped up as the central banker’s vocal public
critic. He was allowed to rant against Rajan for a long time before Prime
Minister Narendra Modi made his unhappiness over the entire issue known,
subtly, in a television interview. By then, Rajan had already issued a
statement saying that he would not be seeking another term and would return to
Chicago’s Booth School of Business, from which he was on leave.

There was
outrage. There were letters of support for Rajan, speculations about who would
succeed him and how he or she would measure up to Rajan in stature,
independence and ability to complete policy and regulatory changes in progress.

Modi’s
choice of Urjit Patel was seen as a safe one. Patel has a doctorate in
economics from Yale University, along with degrees from the University of
Oxford and London School of Economics. He has done stints at the International
Monetary Fund, World Bank, Brookings Institution, Reliance Industries and
Boston Consulting Group, and has been associated with various central and state
government task forces and committees.

Patel is
known to be the architect of the current monetary policy framework of RBI,
which focuses on inflation targeting. He is quieter and lower-profile than
Rajan. The consensus is that continuity in policies will be maintained and that
the government did well in appointing an “insider” to succeed Rajan.